Economics & Catholic Social Teaching

The Journal of Economic Literature, a publication of the American Economics Association, maintains a guide to 'Classification Codes' by which economists identify their field of research. This blog will center on code A130 - the Relation of Economics to Social Values.

Monday, October 19, 2015

All of the talk about how the market model and free markets and orthodox economics always resulting in the best for society are based upon a very precise, detailed economic model of the economy. At its fundamental level, that model is based upon there being many, many producing firms, so many firms that the loss of one or the addition of one would have no impact upon the market. If that condition is not met, then it can be shown, by that very same model, that losses are generated to society. So what do we have? We now have a Justice Department that is raising the standard against which market concentration is measured; this move makes it possible for fewer and larger firms to be declared "safe for healthy competition". People need to realize that more market power, which firms gain when they are allowed to merge and control larger and larger segments of the market, always results in higher prices and diminished consumer surplus. What ends up happening is that shareholders get wealthier and consumers get less. Why does this happen? Let's ask Congress how much they get from lobbyists representing the merging companies and industries where lots of merger activity occur. Congress is no longer ruled by the electorate, they are owned by large corporate interests. Congress no longer cares about doing what is correct for the people because economists have given them the language to make everything appear ok and allow them to feel ok about accepting "advice" from large corporations that are looking out for shareholders and do not give a d___ about the customer.

Thursday, October 8, 2015

Ok, what is wrong with this picture? Nelson Peltz, through Trian Fund Management buys 98.5 million shares, or $2.5 billion worth, of General Electric. That may seem like a lot, but it is not even a filing position, a mere one percent of the outstanding shares. Unlike many that take such a stake in a publicly traded company, Trian has not asked for a seat on the board of directors (yet).
So, what is it that Trian would like? Quite naturally, to enhance shareholder value. How should that be done?
One of the proposals mentioned in a white paper issued by Trian involves GE borrowing money. Taking on additional leverage is not always a bad thing and is frequently viewed in a positive way by the market. However, one of the possible uses of GE borrowing $20.0 billion dollars suggested by Trian is to "return capital to shareholders", better known as stock buybacks. Really???
General Electric in 2014 employed 305,000 employees in 175 different countries (2014 10-K). Through 2012, 2013, and 2014, GE spend $17.46 billion buying back 754.8 million shares of stock. The stock of GE closed at $18.65 per share on January 2, 2012, and closed at $25.06 on December 29, 2014, a 34.4% increase. Seen another way, GE stock rose at about a 10.44% annual rate for those three years. If you started out owning $1,000,000 worth of GE on 1/2/12 you would have ended 2014 with $1,347,053.97 worth of GE. But if you started out 2012 with $1,000,000 in a savings account at your local bank, the one that pays 0.5% interest, you would end 2014 with $1,014,075.13. Clearly, you'd be better off by $331,978.85 by having your money in GE than in a bank.
Nelson Peltz thinks that is not enough of a return for GE. So he wants GE to borrow money and buy back stock so that returns will be higher. Funny thing about this is that in the olden days, long, long ago, a company's stock price reflected its potential future earnings, where earnings were understood to have something to do with producing a good or service. Stock buybacks divert money from being productive to being what we might call sterile. Instead of using money to increase research and development (which requires hiring human beings to do the R&D) in search of new things that can "bring new things to life", instead of building new factories (which requires hiring human beings to do the building) that can produce new goods or old goods less expensively, instead of building new factories that are environmentally sustainable (which includes hiring human beings to design, build, and run), using money to buy back stock does absolutely nothing to help anyone except the shareholders. Buying back stock removes money from the economy to benefit shareholders short-run. Buying back stock instead of funding R&D, instead of producing new goods more efficiently, instead of trying to lead the industrial sector to a pathway of sustainable production merely robs the future in order to enhance shareholder value.
If the shareholders of GE really want to invest in the future, borrow the $20.0 billion as directed by Trian but use it to increase the wages of non-management employees and the lowest two levels of management. Use that $20.0 billion to create an in-house university where workers can improve their stock of human capital. Use that $20.0 billion to fund clean water delivery systems in less developed areas, after all the first step in economic growth is clean water which leads to less disease which leads to the opportunity to become a market economy where people can buy GE products.
Stock buybacks do nothing productive. In an economy with lots of disguised unemployment, with increasing numbers of people dropping out of the labor force because they cannot find work, where we are experiencing one of the slowest growth rates of GDP in decades, we really need to rethink the ethics of stock buybacks.

Wednesday, September 30, 2015

The current crisis is not only economic and financial but is rooted in an ethical and anthropological crisis. Concern with the idols of power, profit, and money, rather than with the value of the human person has become a basic norm for functioning and a crucial criterion for organization. We have forgotten and are still forgetting that over and above business, logic and the parameters of the market is the human being; and that something is men and women in as much as they are human beings by virtue of their profound dignity: to offer them the possibility of living a dignified life and of actively participating in the common good. Benedict XVI reminded us that precisely because it is human, all human activity, including economic activity, must be ethically structured and governed (cf. Encyclical Letter Caritas in Veritate, n. 36). We must return to the centrality of the human being, to a more ethical vision of activities and of human relationships without the fear of losing something.
Pope Francis, taken from address to the Centesimus Annus Pro Pontifice Foundation on 25 May 2013.
Full text at: Address of Pope Francis to the Centesimus Annus Pro Pontifice Foundation

Note in the speech given by Pope Francis to workers in Largo Carlo Felice, Cagliari (Italian island), that the call is not for redistribution of income, rather it is a call for work, for jobs. People without jobs are people without hope, to do no more than give them money is an affront to their dignity as human beings. And note that the idea is not to force them to work rather than simply giving them money, the idea is that working for oneself and one's family brings a nobility of spirit, a measure of justifiable pride that simply receiving a welfare check cannot.
People were not made to work.
Work exists so that people may become complete, more fully human.

Tuesday, September 8, 2015

Of
what may we be sure?

Modern economics teaches us that the human person is best understood as homo oeconomicus, a rational, calculating, creature that always seeks to maximize their utility subject only to budget constraints.

Might there be other ways to understand the human person, an anthropology of the person that would lead to a different way of conceptualizing economics and economic behavior?

Offered for your consideration:

Possible
foundations for an understanding of economic behavior (and human behavior in
general)

I.
Original Sin

By yielding to the
tempter, Adam and Eve committed a personal sin, but this sin affected the
human nature that they would then transmit in a fallen state.
It is a sin which will be transmitted by propagation to all mankind, that is,
by the transmission of a human nature deprived of original holiness and
justice. And that is why original sin is call “sin” only in an analogical
sense: it is a sin “contracted” and not “committed” – a state and not an act.

Although it is proper
to each individual, original sin does not have the character of a personal
fault in any of Adam’s descendants. It is a deprivation of original
holiness and justice, but human nature has not been totally corrupted: it is
wounded in the natural powers proper to it; subject to ignorance, suffering,
and the dominion of death; and inclined to sin – an inclination to evil that is
call “concupiscence.”[1]

II. Bernard Lonergan’s Desire
to Know

Deep within us all,
emergent when the noise of other appetites is stilled, there is a drive to
know, to understand, to see why, to discover the reason, to find the cause, to
explain. Just what is wanted, has many names. In what precisely it
consists, is a matter of dispute. But the fact of inquiry is beyond all
doubt. It can absorb a man. It can keep him for hours, day after
day, year after year, in the narrow prison of his study or his
laboratory. It can send him on dangerous voyages of exploration. It
can withdraw him from other interests, other pursuits, other pleasures, other
achievements. It can fill his waking thoughts, hide from him the world of
ordinary affairs, invade the very fabric of his dreams. It can demand
endless sacrifices that are made without regret though there is only the hope,
never a certain promise, of success. What better symbol could one find
for this obscure, exigent, imperious drive, than a man, naked, running
excitedly crying, “I’ve got it”?[2]

III. Saint John Paul II’s Work as
Vocation

Through work man must
earn his daily bread and contribute to the continual advance of science and
technology and, above all, to elevating unceasingly the cultural and moral
level of the society within which he lives in community with those who belong
to the same family. And work means any activity by man, whether manual or
intellectual, whatever its nature or circumstances; it means any human activity
that can and must be recognized as work, in the midst of all the many
activities of which man is capable and to which he is predisposed by his very
nature, by virtue of humanity itself. Man is made to be in the visible universe
an image and likeness of God himself, and he is placed in it in order to subdue
the earth. From the beginning therefore he is called to work. Work is one of
the characteristics that distinguish man from the rest of creatures, whose
activity for sustaining their lives cannot be called work. Only man is capable
of work, and only man works, at the same time by work occupying his existence
on earth. Thus work bears a particular mark of man and of humanity, the mark of
a person operating within a community of persons. And this mark decides its
interior characteristics; in a sense it constitutes its very nature.[3]

IV. Thorstein Veblen’s Instinct

Like other animals,
man is an agent that acts in response to stimuli afforded by the environment in
which he lives. Like other species, he is a creature of habit and propensity.
But in a higher degree than other species, man mentally digests the content of
the habits under whose guidance he acts, and appreciates the trend of these
habits and propensities. He is in an eminent sense an intelligent agent. By
selective necessity he is endowed with a proclivity for purposeful action. He
is possessed of a discriminating sense of purpose, by force of which all
futility of life or of action is distasteful to him.[4]

V. Adam Smith’s Propensity

This division of
labour, from which so many advantages are derived, is not originally the effect
of any human wisdom, which foresees and intends that general opulence to which
it gives occasion. It is the necessary, though very slow and gradual, consequence
of a certain propensity in human nature which has in view no such extensive
utility; the propensity to truck, barter, and exchange one thing for another.

Whether this
propensity be one of those original principles in human nature, of which no
further account can be given; or whether, as seems more probable, it be the
necessary consequence of the faculties of reason and speech, it belongs not to
our present subject to enquire. It is common to all men, and to be found
in no other race of animals, which seem to know neither this nor any species of
contracts.[5]

VI. Abram Maslow’s Hierarchy

These basic goals are
related to each other, being arranged in a hierarchy of prepotency. This means
that the most prepotent goal will monopolize consciousness and will tend of
itself to organize the recruitment of the various capacities of the organism.
The less prepotent needs are minimized, even forgotten or denied. But when a
need is fairly well satisfied, the next prepotent ('higher') need emerges, in
turn to dominate the conscious life and to serve as the center of organization
of behavior, since gratified needs are not active motivators.

Tuesday, August 25, 2015

Part of the problem in the labor markets has always been that employers see workers simply as inputs to the production process. As such, it is only the objective nature of work that is considered; from that perspective workers are paid as close to the marginal revenue product of labor that firms can estimate. The employee's future is simply their own and no one in the firm really cares.

However, as we learn from the social doctrine of the Church, there is that subjective nature of work that must also be considered. It is the subjective nature of work in which one sees that we are not made to work, that work was made for us. The subjective nature of work teaches all that we are not simply inputs. We become better off when we work. Work involves creation of one sort or another and it is in creating that we more fully reflect being made in the image of God. The subjective nature of work does not deal with output (that is the objective nature), it deals with the person and the development of the person. The future of the person matters when we see the subjective nature of work.

Chipotle's increase in wages does partly reflects a new understanding of the objective nature of work. The quantity supplied of workers at the current wage structure is below the quantity demanded for workers.

But note that the "war on talent" is causing these fast-food firms to address the person's development as a person; the future of the employee has become important to the firm. Workers are seen as something more than mere inputs. Tuition reimbursement makes the worker a more complete person with better opportunities in the future. To be sure, these non-wage offerings are aimed to enable the worker to rise within the firm. Yet, to the degree that something more than money is offered allows the employee to grow as a person and is a movement in the direction of being concerned with the subjective nature of work.